Theseus says this near the end of the play. It means that the best play is only a shadow (a limited outline or imitation of life), and the worst play no worse (than the shadow, or than the play put on by the rude mechanicals). It shows Theseus' kind character, nudges the audience that they've been laughing at people's limitations (rather than entering into the spirit of the play), and comments on the larger play itself that the audiences is watching.